Metalico Inc. (MEA)

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Metalico, Inc. Q2 2010 Earnings Call Transcript

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Metalico, Inc. (MEA) Q2 2010 Earnings Call August 05, 2010 10:00 am ET

Operator

Good morning, my name is Melissa and I will be your conference facilitator. At this time, I would like to welcome everyone to the Metalico 2010 second quarter results call. (Operator Instructions) The purpose of today's call is to discuss the results of the company's operations for the quarter ended June 30, 2010.

Earlier today, Metalico issued a press release announcing second quarter results and filed a report on Form 8-K in connection with the release. The company is scheduled to file its quarterly report on From 10-Q for the quarter shortly. You can access copies of Metalico's filings through the SEC at their online files or directly through the company's website at www.metalico.com.

Just log on to the website, click on Investors at the top of the home page and then click on SEC filings in the left column, then click to download the report. Metalico's filings are also available at the SEC's website at www.sec.gov.

In addition, an audio replay of the call will also be available at 800-642-1687 or 706-645-9291 for the first week after the call's conclusion. To access the recording, callers will be required to enter the conference identification number of 889-706-53.

As it is customary, let me reiterate the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. The following discussion contains forward-looking statements that are subject to risks and uncertainties, including those risks set forth in Metalico's filings with the SEC. These risks could cause actual results for the current period and beyond to differ materially from those expressed in any forward-looking statements made by or on behalf of the company.

We refer you to Metalico's periodic reports that are filed from time to time with the SEC. For a more detailed discussion of forward-looking statements and a discussion of the factors that could cause results to differ materially from the discussion’s today, please refer to the risk factor discussion in Metalico's annual report on Form 10-K for 2009, which is also available online.

In addition, during the course of the conference call, certain non-GAAP financial measures may be described which should be considered in addition to and not in lieu of comparable GAAP financial measures. The company has provided reconciliations of these non-GAAP measures to what it believes are the most directly comparable GAAP measures in the earnings release.

Thank you, ladies and gentlemen. I would now like to turn the call over to Mr. Carlos Aguero, President and Chief Executive Officer of Metalico.

Carlos Aguero

Carlos Aguero

Good morning and thank you for joining our call. With me here today are Michael Drury, our Executive Vice President and Eric Finlayson, our Senior Vice President and Chief Financial Officer. Following my presentation, we will be available to answer any questions you might have.

We will also post a transcript of our remarks and the question-and-answer session on the Metalico website when the transcript becomes available after the call. Earlier today, Metalico released financial results for the second quarter of 2010 showing improvements in revenue, operating income, net income and EBITDA as compared to same period in 2009. At the same time, on a sequential basis sales and net income improved, but several key measures of operating performance declined in comparison. We view this as the results of an acceptable quarter suffering by comparison to an outstanding first period result.

Now let’s go over some of the highlights. Second quarter financial highlights include the following, all as compared to the second quarter of 2009. Sales increased to a $144.6 million, an increase of $82.3 million or 132% over the $62 million of last year. Operating income was $6.7 million compared to operating income of $2.8, an increase of $3.9 or 139%.

Net income increased to $4.4 million, tripling from net income of $1.1. EBITDA rose to $10.7 million, an increase of $4.3 or 67% over the $6.4 million last year. Net income of $0.10 per diluted share compared to net income of $0.03 per share. Unit volume shift increased by 40% for ferrous scrap and 77% for non-ferrous scrap.

PGM unit volumes increased 165% to a total of 39,042 troy ounces from 14,690 troy ounces. Lead product shipments were down 33% from Q2 of ‘09 related primarily to unusually high ammunition product related sales in ‘09.

Excluding corporate overhead charges, the company’s scrap segment saw operating income more than triple to $8.8 million from $2.7 million. While the Lead Fabricating segment showed an operating loss of $100,000 compared to an operating income of $1.6 million in the second quarter of ‘09.

Compared sequentially with the first quarter of 2010, sales and net income improved, but operating income and EBITDA were lower. Sales increased to $144.6 million, an increase of $10.5 million or 8% over the $134.1 million posted in the first quarter. Operating income was $6.7 million compared to $13.6 million, a decrease of $6.9 or 51%.

Net income increased to $4.4 million, a 26% improvement from net income of $3.5 million. EBITDA decreased to $10.7, a decrease of $6.9 million or 39% versus $17.6 million. Net income of $0.10 per share compared to net income of $0.08 per share. Unit volumes shipped decreased by 19% for ferrous scrap and remain virtually flat for non-ferrous scrap. PGM unit volumes increased 9% to 39,042 troy ounces from 35,704 troy ounces shipped in the first quarter. And finally, lead product shipments were up 32% sequentially from Q1 of 2010.

Although second quarter results have now reached the levels we wanted, Metalico still had a stellar first half of the year. Let me just briefly recap this for you. Sales of $279 million was more than double last year’s first half total of $115. Operating income of $20.4 million was almost seven times better than the $3 million posted last year.

We posted net income of almost $8 million compared to $2.5 million loss last year. Earnings per share were a positive $0.17 after a $0.04 net after-tax charge for finance cost, as compared to last year where we had a loss of $0.07 per share. Compared to last year first half, interest expenses has decreased by $3.5 million while total debt decreased by $20 million since last June, meaning we have greatly reduced borrowing costs and our leverage.

From a year ago, Metalico’s networking capital has increased by almost $20 million to $93 million. Additionally, as of today, availability on our revolver stands at approximately $25 million which more than adequately accommodates anticipated capital needs for the remainder of the year. Capital expenditure for the second quarter totaled $2.5 million, an increase from $1.1 million in the first quarter of 2010. We expended $2.4 million for scrap metal recycling segment and a $120,000 for the lead segment. The purchases were primarily for scrap handling equipment, trucks and replacement containers.

As of June 30, Metalico had approximately $46.4 million common shares issued and outstanding and no preferred stock outstanding. Let’s break down the quarter starting with scrap metal first. Scrap segment generated sales of $126.4 million, more than two and a half times to $44.3 posted in the second quarter of 2009.

We derived 32% of our scrap revenue in the quarter from ferrous and 68% from all non-ferrous metal. Operating profit for the scrap segment before corporate overhead rose to $8.8 million compared to $2.7 million in the same quarter last year. We realized a 91% increase in our first average sales price to $392 per gross tone this quarter up by $187 compared to the average that was posted last year of $205 per gross ton, and a $35 per gross ton sequential rise from $357 in the first quarter of 2010.

In April, selling prices for ferrous scrap metal increased and domestic demand remained firm while scrap buying prices and volume rose steadily. The remainder of the quarter was marked by steadily declining ferrous selling prices with some grades of scrap in surplus along with lackluster demand from many consumers.

Metalico’s average inventory cost rose during the period and the company filled 19% less scrap as compared to the first quarter. Non-ferrous markets were impacted by price volatility brought on by concerns over Europe’s sovereign debt issues and banking concerns. The average selling price for non-ferrous scrap in the quarter was a $1.11 per pound compared to $0.83 per pound in the prior year quarter and a $1.05 in the first quarter of this year.

In our last quarterly update, we explained the change in how we report PGM units converting all reported volumes to troy ounces instead of pounds of substrate consistent with industry standards. PGM prices in the second quarter were much higher than a year ago reflecting increased precious metal investment demand and automobile production, and its impact on PGM prices. We realized an average PGM selling price of $1122 per troy ounce compared to last year’s $661 per ounce and this year’s prior quarter selling price of $966 per ounce.

Metalico’s volume of metal sold for the second quarter included $103,200 gross tons of ferrous scrap, that’s a 40% increase over the $73,700 tons sold in Q2 of 2009, but it is a 19% decrease sequentially. We shipped 36.1 million pounds of non-ferrous metal in the quarter, another significant year over-year-increase of 77% from the 20.4 million pounds over a year ago and a small increase of this year’s first quarter.

Aluminum, stainless steel and nickel-based alloys as well as copper, brass and molybdenum continue to be the primary contributors to our non-PGM volumes of non-ferrous scrap metal sold. The 39,000 troy ounces of PGM sold in the quarter was two and a half times more than last year’s 14,690 troy ounces and 9% higher than the first quarter 2010 shipment.

Let’s move on now to the Lead Fabricating segment. In this year second quarter, we generated sales of $18.2 million compared to same period sales of $18 million in ‘09. We generated an operating loss before corporate overhead of approximately $99,000 compared to operating income of $1.6 million for the second quarter last year.

The lead segment continues to be impacted by competitive pressures and weak demand in many of the markets the company sells to. Segments of the economy such as commercial construction including medical facilities, diagnostic and therapy equipment manufacturers, plumbing supply, lead anode consumers, all remain impacted by the continuing economic softness. However, shot sales, seasonal roof flashings and department of defense sales remain robust.

The lead segment realized an average selling price of a $1.42 per pound in the quarter compared to $0.94 per pound in the second quarter of 2009 and a $1.46 in this year’s first quarter. Volumes rose by 32% sequentially to 12.8 million pounds, but were lower year-over-year due to last year’s strong market for ammunition-related products when we sold 19.1 million pounds in the second quarter.

The second quarter results like those of the first quarter demonstrate that our efforts to reduce an interest expense, to control operating cost and focus on profits over volume enabled the company to post strong results even in the sluggish economy.

We remain optimistic about our performance even in the absence of a strong recovery. During the quarter, our 700 employees performed their jobs professionally, efficiently and safely and as always we want to express our appreciation to employees at all levels of the company for their significant contribution.

Now, a word on guidance and forward-looking statements; Metalico’s practice like many others in our industry is not to provide guidance on earnings or earnings estimates. The scrap recycling industry is highly cyclical and commodity metal markets are often very erratic. We believe that earnings estimates could be unreliable because of the unpredictability, duration and magnitude of commodity pricing.

Having said that, let’s now go through our second quarter recap and third quarter outlook. Going into the third quarter, we believe the domestic scrap prices have stabilized and demand is once again supported by the export market. The short-term strength of the dollar in the second quarter helped drive many ferrous export consumers from the US market.

Now that the dollar has weakened, the export buyers are returning providing competition to domestic metals for available ferrous scrap. By an event that once again drives capital a dollar as a safe haven, we expect a weaker dollar will support a much more active export market.

Metalico views the second quarter low as a buying opportunity and is well positioned with ample inventories to participate in the anticipated improvement in the ferrous market. Demand for non-ferrous scrap continues to be strong, but pricing for most grades declined modestly throughout the quarter in part due to the strength in the US dollar and weakness in the Euro. The flow of non-ferrous scrap into yards have slowed down somewhat from the brisk pace of early to middle spring, but is expected to improve as long as non-ferrous metal pricing maintains its recent improvements.

Domestic, non-ferrous consumers appear to have strong order books, which should help support prices and keep scrap in high demand and export market consumers are recently more active in buying scrap once again as supported by a weaker dollar. Demand for aluminum de-ox has slowed. Selling prices have declined in tandem with the London Metal Exchange and a drop in steel industry capacity utilization. But recently de-ox selling prices have been stabilizing, but at lower levels than they were earlier this year.

During the second quarter, we experienced a significant improvement in PGM troy ounces recycled. This was driven by aggressive buying complemented by strong metal selling prices in the early part of the quarter and resulted in great performance for this part of our business. Average prices for PGM declined approximately 10% in the latter part of the quarter resulting in reduced supply of catalysts. Barring non-market pricing disruption, we believe that PGM prices will continue to recover during the remainder of 2010, which will help drive the supply of catalysts into the market place.

As mentioned earlier, the lead segments have been impacted by sluggish industrial demand, which increased competitive pressures. That is, the industry has a same production capacity chasing reduced demand across a broad array of industries. We continue to market our products aggressively so as not to lose market share. We are investing our productivity improvement and are taking steps to position ourselves in new markets that we have not previously serviced.

As we stated before, our goal is to continue to be a leading participant in the secondary commodity metal businesses and the complementary niche businesses in which we operate. We are focused on increasing operating density within our existing geographic markets and we will further leverage our existing platforms by proactive sourcing and internalizing scrap flows. We are investing in complimentary scrap processing capacity edition as well as expansions and tuck-in acquisition where and when they might become available.

Finally, we look ahead to the second half optimistic that the market condition that prevailed early in the year will again be present and help drive the economy, our industry and particularly our company to achieve the results that we all want.

This concludes our prepared remarks and with that, operator, I would like to open up the call for any questions we might have.

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